Two Wall Street firms downgrade Connecticut bonds

Published 6:03 pm, Thursday, May 19, 2016

HARTFORD >> Two of the four Wall Street rating agencies lowered Connecticut’s credit rating one notch prior to an upcoming bond sale.

Standard & Poor’s and Fitch Ratings lowered Connecticut’s general obligation bonds from AA to AA-. Moody’s Investors Service and Kroll Bond Ratings affirmed their Aa3 and AA ratings, respectively, but gave the bonds a negative outlook, which means they will be under review for one or two years.

The downgrade, according to S&P Global Ratings credit analyst David Hitchcock, reflects the lack of flexibility in Connecticut’s budget. The rising debt service, pension and other fixed costs are becoming a significant portion of the overall budget and could hamper the state’s ability to make further budget cuts if revenue falls short.

“In our opinion, Connecticut has less flexibility to meet unanticipated revenue shortfalls, such as those that occurred in fiscal 2016, and may be poorly positioned should there be a national economic downturn in the next several years,” Hitchcock said.

Even though the state cut more than $820 million from the fiscal 2017 budget, it did nothing to boost reserves or reduce future budget deficits. However, Hitchcock gave Connecticut’s bonds a stable rating due largely to the legislature’s attempt to make structural budget adjustments.

“Should Connecticut restore material budgetary flexibility either through the build-up of material ongoing reserve levels, or if fixed costs fall as a percent of budget, we could potentially raise our rating on the state,” Hitchcock said. “However, should unfunded pension or OPEB liabilities rise significantly, or large revenue shortfalls reoccur without additional offsetting budget adjustments, we could lower our rating.”